Credit agreements

Below are listed some of the more common types of credit agreement:

Bank overdraft - this is a type of revolving credit which allows a customer to overdraw on their current account, normally up to an agreed limit. Penalties for unauthorised overdrafts can be severe.

Hire purchase/Conditional sale agreement - very similar in composition, the main difference between the two is that in a conditional sale agreement the customer is committed to purchasing the goods whereas in a hire purchase agreement the customer is hiring the goods until the last payment is made which contains a nominal option to buy payment. Main similarity is that in both types of agreement the goods do not become the property of the customer until the final payment is made so the goods remain the property of the creditor till then.

There are special conditions governing protection and termination of these two types of agreement. If a customer has paid one third or more of the total price of the goods they become protected and the creditor would need a court order to repossess them. (Note-in Scotland it can be argued that a creditor would need a court order at any time to repossess) There are also rights governing voluntary termination by a customer. If a customer has paid more a half or more of the total price payable they can terminate the agreement and hand back the goods. If they have paid less than half the total price they can still terminate but would have to make up the difference. The customer must give written notice to the creditor that they wish to terminate the agreement and must do it before the creditor terminates otherwise the opportunity will, be lost. Termination is different from voluntarily handing back the goods where the customer may find themselves with no goods and having to pay any shortfall. 

Credit card - this is again a type of revolving credit where the customer can use the card to purchase goods or services or even draw cash advances. The card normally has a borrowing or spending limit which the customer should not exceed or there may be penalties. Customer can make a minimum monthly or whatever they can afford. Interest at a varying rate is added to the balance.

Credit sale agreement - this is a straight forward agreement where the customer purchases goods and agrees to make regular payments over a set period of time. The customer immediately becomes the owner of the goods and the interest rate may vary.

Secured loan (Second mortgage) - in this type of loan the customer puts up some form of security, normally the home. This loan may or may not be regulated by the consumer credit act depending on its purpose and when it was taken out. Prior to April 2008 the consumer credit act only applied to agreements worth £25,000 or less. Also not covered by the consumer credit act were secured loans that had been taken out with the first mortgage lender for home improvements. When the financial limits were removed from the Act all secured lending come under its jurisdiction.

The first-charge mortgage sector (your traditional home-purchase mortgage) is regulated by the Financial Conduct Authority (FCA).

Credit agreements (withdrawal)

The client has the right to withdraw from a prospective credit agreement at any time before it has been executed (e.g. signed by both parties).

Credit agreements (cancellation)

From the 1 February 2011 a customer has the right to withdraw from a credit agreement within 14 days without giving any reason under the consumer credit directive. It applies to all regulated agreements except:

• agreements for credit exceeding £60,260 
• agreements secured on land 
• restricted-use credit agreements to finance the purchase of land 
• agreements for bridging loans in connection with the purchase of land

If the agreement was made before 1 February 2011, cancellation rights apply only where the credit agreement was:

• signed away from the trade premises; and 
• following face to face negotiation with the creditor or supplier. Telephone calls do not count as face to face

In this case the client has a five day cooling off period from receipt of the creditor's signed copy of the agreement and a notice of cancellation rights.

For guidance on the Consumer Credit Directive click here